Finish the finance economic short essay with quailty work.
qwertyu43
Ch8.1.pptxKey Points
To understand and compare the fiscal behavior of state and local governments we must consider:
The costs of producing services by state and local governments
The components of production costs
Factors that affect those costs
Measurement and Production
The production of goods and services require inputs:
Labor
Capital Goods
Materials and Supplies
Measurement and Production
Directly produced output is created by using these inputs.
A production function shows the maximum amount that can be produced with a given set of inputs.
The production function embodies a technology that determines both how and how much can be produced.
Measurement and Production
A production function:
Q = q(L, K, X)
L = labor input
K = capital input
X = inputs of other materials and supplies
q() represents any number of possible ways of using inputs to produce a given level of output.
Q = 3L0.6K0.3X0.1
Measurement and Production
The cost of producing any given amount of directly produced output depends on the technology and the prices of the required inputs.
Cost of Q1 = wL1 + rK1 + pX1
w = price of labor
r = price of capital
p = the set of prices of the other inputs
Assume the government wants to minimize the cost of production
Measurement and Production
The cost of producing the directly produced output also represents the expenditures on it.
Measurement and Production
The benefit the community gets from the directly produced output is given by a consumer output function.
G = g(Q, X, N, E)
G = consumer output
g() = transformation function from output to results
X = private goods purchased directly by individuals
N = population to be served
E= environment, a set of community and population characteristics
Measurement and Production
Note that the cost of more directly produced output (Q) is different than the cost of more consumer output (G).
G depends on X, N, and E which are not under the government’s control.
X may be positively or negatively related to G depending on whether it contributes to production or acts as a burden on production.
Changes in N or E may require more Q to keep G constant.
Measurement and Production
There are three broad ways to measure the output of state and local governments.
The amount of money spent on inputs (expenditures)
The amount of directly produced output
The outcomes or results of that output
Measurement and Production
Compare expenditures to output:
Directly produced output can fall even if expenditures are constant or growing.
Two different jurisdictions providing equal per capita expenditures on a particular function may result in different produced outputs.
Measurement and Production
Expenditures equal costs and costs depend on
The amount of the inputs used
The prices of the inputs used
An increase in input prices will increase the costs of providing the same amount of output.
If input prices vary between jurisdictions, equal expenditures do not translate into equal output.
Measurement and Production
These points are important because expenditures are the most commonly used measure of state and local government output over time and between jurisdictions.
Expenditures can be deflated by a price index at the federal and state level.
No general price index exists to deflate local expenditures.
Measurement and Production
Compare output to consumption results:
The result for a particular service could decline or worsen even though the government provides constant or increasing direct output.
Even if two governments provide equal directly produced output, residents of those jurisdictions may receive different results.
Measurement and Production
The consumer result also depends on:
Private consumption
Fire extinguishers improve fire protection.
The environmental characteristics of the
community and population.
One might expect more fires and more serious fires in a community with fewer smoke detectors or older buildings.
Equal fire protection in two cities may require more direct production in one versus another.
Measurement and Production
Four reasons why government expenditures may not be very good measures of the ultimate benefits received by consumers.
Production and technology
Input prices
Community environmental characteristics
Private consumption
Measurement and Production
The idea of focusing on result rather than spending is called benchmarking.
State and local governments evaluate programs by a series of benchmarks or performance measures comparing one jurisdiction to another.
The idea is that a focus on results will help governments do a better job of allocating resources.
Measurement and Production
Labor cost is a major component of state and local government costs and expenditures.
State and local governments provide goods and services to individuals and businesses.
Labor costs are a much smaller component of federal government expenditures, because the federal government provides few services directly.
Measurement and Production
The wage and salary share of direct expenditures for all levels of government in the US has decreased substantially.
Changes in what services governments provide
Changes in how the services are provided
Changes in how employees are compensated
Measurement and Production
While it is difficult to compare salaries or wage costs for state and local governments compared to the federal government or private businesses some studies have been done.
Compensation for government workers and private workers were similar for activities common to both.
Wages and salaries of state and local workers were lower than private workers, but retirement and health-care benefits were greater.
The Pension Funding Crisis
The compensation of many state and local government employees includes retirement benefits in the form of defined-benefit pension programs.
The future retirement payments from the pension funds represent deferred compensation to employees.
The Pension Funding Crisis
Some governments may have sought to keep current costs down and deferring the costs to the future.
This would be the case if the government did not continually make sufficient payments to pension funds to pay future benefits fully.
This is know as the problem of underfunded public pensions.
These liabilities may represent a claim on future receipts and assets of the government.
The Pension Funding Crisis
Measuring future liability for employee pension costs requires:
An estimate of both the value of assets for the pension program
A value for future liabilities
The unfunded liability is the difference between the two numbers.
The Pension Funding Crisis
It is difficult to determine the unfunded liability.
The value of the assets in the pension fund can vary substantially from day to day.
The unfunded liability will change depending on when the asset value estimates are made.
Estimates of pension liabilities depend on
Whether liabilities are counted for all retirees and current public employees or only liabilities incurred to date.
The discount rate used to calculate the present value of future liabilities (the rate of return).
The Pension Funding Crisis
There is general agreement that state and local pension programs in aggregate, as well as most individual programs, are underfunded.
The disagreement is how big the problem is.
Two key points:
The estimated financial liability depends on the estimated returns to the pension programs.
The estimated financial status depends directly on the status of the investment markets.
The Pension Funding Crisis
State and local governments with substantially underfunded pension programs have a few options.
The government may allocate current revenue to increase payments to plans so that assets grow and become sufficient to pay benefits.
The government could change employee conditions
Reduce benefits
Require larger payments
Increase the retirement age
The Pension Funding Crisis
The fundamental dilemma:
Are employment arrangements with past workers to be revised after the fact? or
Will current taxpayers bear the cost of the compensation to those workers that was deferred by past taxpayers?
